MONTREAL - Resolute Forest Products Inc. (NYSE: RFP) (TSX: RFP) today reported a net loss for the quarter ended March 31, 2014, excluding special items, of $26 million, or $0.27 per share, down from net income, excluding special items, of $28 million, or $0.30 per share, in the first quarter of 2013. GAAP net loss was $50 million, or $0.53 per share, compared to $5 million, or $0.05 per share, in the first quarter of 2013. Sales were $1.0 billion in the quarter, down by $58 million from the first quarter of 2013.

"Operating costs ordinarily peak in winter, but this year has been extremely cold, and its effects weighed heavily on our quarterly results," said Richard Garneau, president and chief executive officer. "The abnormally cold winter caused a material increase in energy costs, production disruptions, equipment failures and distribution constraints. Though some of these effects will carry into the second quarter, we're focused on moving beyond this disappointing quarter, committed to maximize our competitive advantage in this challenging industry and improve our earnings power."

Non-GAAP financial measures, such as adjustments for special items and adjusted EBITDA, are reconciled below.

Consolidated Quarterly Operating Income Variance Against Year-Ago Period

The Company recorded an operating loss of $33 million in the first quarter, compared to $49 million in the year-ago period. The seasonal effect of winter was significantly more severe in 2014, adversely affecting operating income by $55 million, and outweighing the favorable effect of the weaker Canadian dollar ($32 million). The effects of the abnormally cold winter included:

higher steam costs because of higher fuel energy pricing throughout most of the network and an increase in usage, particularly at the U.S. southeast mills, which are not designed for sustained freezing conditions; high electricity costs at the Ontario mills because of volatility and sharp increases in that province's market-based power rates; approximately 30,000 metric tons of lost production due to natural gas curtailments, electricity costs or other process limitations and distribution constraints for lack of carrier availability; and additional costs of freight, fiber in the U.S., labor, chemicals and maintenance.

The Company also experienced a greater than expected level of operational disruptions in the quarter, including mechanical failures in Catawba, the failure of the bleaching tower and a turbine valve at Saint-Félicien, and a failure in a machine's vacuum blower at Augusta. Operational disruptions accounted for approximately 25,000 metric tons of lost production in the quarter, and $7 million of additional costs.

Overall pricing was lower this quarter ($15 million) because of lower average transaction prices in newsprint, specialty papers and wood products, more than offsetting the 8% increase in market pulp prices. In a segment facing secular decline, newsprint shipments were 3% higher, despite the effects of the abnormal weather and operational disruptions. Wood products shipments also rose by 4%. But shipments fell by 7% in specialty papers due to the abnormal weather and operational disruptions, and by 10% in market pulp for the same reasons, plus an increase in inventory as a result of timing and distribution constraints for lack of carrier availability. Manufacturing costs increased largely because of the effect of the abnormal winter and the operational disruptions, but also because of higher stumpage fees and other costs associated with the comprehensive modification of the forest tenure system in the province of Québec. These increases were only partly offset by the absence of start-up costs, lower pension and other postretirement benefit expenses, the addition of electricity cogeneration production at Thunder Bay and Gatineau, and lower labor costs from restructuring initiatives. Selling, general and administrative expenses were $8 million lower in the quarter. Because of the timing of asset optimization and mill restructuring initiatives, closure costs, impairment and other related charges were $30 million lower in the first quarter of 2014.

Segment Operating Income Variance Against Prior Quarter

Newsprint

Newsprint generated an operating loss of $15 million in the first quarter, compared to $19 million of operating income in the fourth quarter of 2013. The weaker Canadian dollar as well as mix and price deterioration in certain export markets caused the average transaction price to slip by 2%. Shipments were 6% lower compared to the fourth quarter, largely as a result of weather-related production disruptions, a mechanical failure at the Augusta mill and shipment timing. Despite the favorable effect of the weaker Canadian dollar, operating cost per unit (the "delivered cost") rose by 8%, to $623 per metric ton, mostly due to the severe winter, particularly the cost of electricity at Ontario mills. Shipment timing was the largest contributor to the 26,000 metric ton increase in finished goods inventory.

Specialty Papers

Specialty papers generated an operating loss of $24 million in the quarter, compared to operating income of $11 million in the previous quarter. The average transaction price fell by 3%, led by sustained pressure in coated mechanical grades and, to a lesser degree, in supercalender grades. Overall shipments fell by 11%, reflecting seasonality in catalogue and retail end-uses, grade substitution, weather-related production disruptions and mechanical failures in Catawba. Despite the favorable effects of the weaker Canadian dollar and increased cogeneration production, the delivered cost rose by 8%, to $774 per short ton, mostly as a result of the severe winter, including a significant increase in steam costs, particularly at our U.S. southeast mills, and also additional costs following the mechanical failures at Catawba.

Market Pulp

Operating income was $8 million in the first quarter, compared to $16 million in the previous quarter. The average transaction price rose across all grades, by 3% overall, but shipments fell by 20%. In addition to the 23% increase in finished goods inventory, largely because of weather-related distribution constraints, vessel timing and one mill's pre-outage inventory build, the drop in shipments reflects an increase in internal consumption of hardwood kraft pulp, operational disruptions at Saint-Félicien and weather-related production disruptions. These factors also pushed the delivered cost up by 5%, to $674 per metric ton, despite a drop in general maintenance costs.

Wood Products

Compared to the fourth quarter, operating income in the wood products segment rose by $3 million, to $12 million. The average transaction price rose by 2% but shipments dropped by 7% and inventory rose significantly, mostly due to softer demand as a result of the abnormal winter and distribution constraints for lack of carrier availability. The delivered cost fell by 2%, reflecting the weaker Canadian dollar and the retroactive reversal of certain export duties, despite an increase in log costs.

Outlook

Mr. Garneau added: "The costs of natural gas and Ontario power normalized through April, but distribution constraints will likely continue through the second quarter, which will weigh on shipments as well as freight and warehousing costs. Despite that, we expect to reduce inventory and increase shipment volumes across all segments. Recent industry conversion announcements suggest higher newsprint operating rates toward the later part of the year. The coated papers portion of our specialty papers segment is expected to remain under pressure as a result of lower demand. Market prices for lumber have been trending down until recently due to the cautious recovery in U.S. housing starts."

Description of Special Items

About Resolute Forest Products
Resolute Forest Products is a global leader in the forest products industry with a diverse range of products, including newsprint, specialty papers, market pulp and wood products. The Company owns or operates over 40 pulp and paper mills and wood products facilities in the United States, Canada and South Korea, and power generation assets in Canada. Marketing its products in close to 90 countries, Resolute has third-party certified 100% of its managed woodlands to at least one of three internationally recognized sustainable forest management standards. The shares of Resolute Forest Products trade under the stock symbol RFP on both the New York Stock Exchange and the Toronto Stock Exchange.

Resolute and other member companies of the Forest Products Association of Canada, as well as a number of environmental organizations, are partners in the Canadian Boreal Forest Agreement. The group works to identify solutions to conservation issues that meet the goal of balancing equally the three pillars of sustainability linked to human activities: environmental, social and economic.

RESOLUTE FOREST PRODUCTS INC.
Notes to the Unaudited Consolidated Financial Statement Information

1. Closure costs, impairment and other related charges for the three months ended March 31, 2014 and 2013 were comprised of the following:

2. Other (expense) income, net for the three months ended March 31, 2014 and 2013 was comprised of the following:

3. During the three months ended March 31, 2014, we recorded an income tax benefit of $8 million. When compared to an expected income tax benefit of $20 million based on the U.S. federal statutory income tax rate of 35%, our income tax benefit recorded reflects a net increase in valuation allowances, as well as foreign exchange related items.

4. For the calculation of basic and diluted net loss per share for the three months ended March 31, 2014 and 2013, no adjustments to net loss attributable to Resolute Forest Products Inc. were necessary.

5. Tables represent a reconciliation of certain financial statement line items reported under generally accepted accounting principles ("GAAP") to our use of non-GAAP measures of operating income (loss), net income (loss) and net income (loss) per share ("EPS"), in each case adjusted for special items, as well as EBITDA and adjusted EBITDA, in each case by reportable segment. We believe that these measures are useful because they allow the reader to more easily compare our ongoing operations, financial performance, and EPS from period to period.  They are also consistent with the indicators management uses internally to measure our performance. These non-GAAP measures should be considered in addition to and not a substitute for measures of financial performance calculated and presented in accordance with GAAP in our Consolidated Statement of Operations in our filings with the Securities and Exchange Commission. Consequently, readers should rely on GAAP operating income (loss), operating income (loss) by reportable segment, net income (loss) and EPS. Non-GAAP measures included in our press release include:

Operating income (loss) adjusted for special items - is defined as operating income (loss) from our Consolidated Statements of Operations excluding special items, such as closure costs, impairment and other related charges, inventory write-downs related to closures, start up costs of idled mills, gains and losses on disposition of assets, transaction costs and other charges or credits that are excluded from our segment's performance from GAAP operating income (loss).

Net income (loss) adjusted for special items - is defined as net income (loss) from our Consolidated Statements of Operations excluding the same items as under operating income (loss) adjusted for the special items, in addition to the effects of foreign currency translation, net loss on extinguishment of debt, other income (expense) and U.S. deferred income tax asset valuation allowance.

EPS adjusted for special items - is defined as diluted EPS calculated based on the net income (loss) adjusted for special items as described above.

EBITDA by reportable segment - is defined as net income (loss) including noncontrolling interests from our Consolidated Statements of Operations, allocated to each of our reportable segments (newsprint, specialty papers, market pulp and wood products) in accordance with FASB ASC 290, "Segment Reporting," and adjusted for depreciation and amortization.  EBITDA for the corporate and other segment is defined as net income (loss) including noncontrolling interests from our Consolidated Statements of Operations after the allocation to reportable segments, adjusted for interest expense, income taxes and depreciation and amortization.

Adjusted EBITDA - is defined as EBITDA excluding the special items described above.  

SOURCE: Resolute Forest Products Inc.